Sally Beauty Can Rise 17.5%: JPMorgan

By Teresa Rivas

Sally Beauty (SBH) gained 2.7% in regular trading today to $28.08, as JPMorgan initiated coverage of the Overweight rating–but the shares could still rise another 17.5%.

Today Ike Boruchow, Jr. assigned the stock a $33 price target; he sees the stock advancing thanks to Sally’s dominant position in the stable and growing professional beauty industry, as well as “structural margin drivers.”

He also applauds the company’s strong balance sheet and notes “both strong FCF generation and financial

leverage could be used in tandem to support meaningful share repurchases.” Boruchow admits that the stock, which is flirting with its June 52-week high, has already had a good run, but thinks that it can still generate further returns, given the potential for 20%+ bottom line growth.

Read highlights from his initiation note below:

Market leader in large and growing category. SBH is the market leader (31% channel share) within the stable US professional beauty and supply industry that has seen POS retail sales increase from $3.1 billion in 1990 to $8.4 billion in 2011 (a 5% CAGR with growth rates that have accelerated in recent years to 5- 7%). We see the opportunity for high-single-digit top-line growth for the foreseeable future, driven by 4-5% comps (category growth, share gains) and 4% footage (4,410 stores today to 6,100 longer term).

Underappreciated capability to shrink the float 7-8% annually. Today, (along with its newly announced $300 million buyback program), due to the company’s stable category (replenishment business) that is much less cyclical relative to other specialty retailers, we feel SBH could begin to utilize debt to finance incremental share repurchases. When taking a deeper dive into the longterm accretion potential, we believe ongoing buybacks could drive 7-8% bottom-line growth by FY14 (or $1.00 of accretion over the next 4-5 years).

$33 Dec 2013 price target – Initiate OW. Our $33 Dec 2013 PT is based on 20x our FY13E EPS. Given the scarcity for “defensive-growth” names, we think investors should look to SBH for a market share leader in a strong/stable industry with potential for 20%+ EPS growth for the next several years.

Sally isn’t the only cosmetics company to log recent gains. Ulta (ULTA) also moved up on the day and is only about 3.5% off its June high.

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